Friday, 11 November 2016

The “Indian Star” still set to shine

Indian equities are more attractively valued than most other emerging market stocks and could be the star set to shine brightest within the rallying emerging market space due to more attractive valuations and stronger economic fundamentals. The country’s stock market is likely to have further to run despite concerns that the MSCI Emerging Markets index has already performed strongly this year.

India has lagged behind rallying regions such as Brazil and Russia year-to-date, which have been bolstered by the increase in commodity prices and formerly poor returns reducing valuation risk for investors. The rebound in emerging markets has been driven by a rally in value stocks, particularly in markets which had been worst hit. Both Russia and Brazilian markets had suffered from political issues and were impacted by the collapse in commodity and oil prices, India on the other hand has slipped behind as the initial euphoria of prime minister Narendra Modi’s election gave way to disappointment that changes were not likely to immediately impact the economy.

Following five lacklustre years for emerging market equities, the sector rapidly gained popularity this year due to aforementioned commodity prices and heightened political uncertainty across most developed markets. This, combined with historically high valuations across the likes of the US and the UK, led to many investors piling into the market.

Given that the MSCI Emerging Markets index has almost tripled the performance of the FTSE 100 and has outperformed the MSCI World index by more than a third in 2016 so far, investors could well be looking to trim their emerging market exposure rather than adding to it.

However, there are three main drivers at play for the Indian economy specifically, which could therefore have a positive knock-on effect on Indian equities. Firstly, market valuations in the country are far cheaper on average than other emerging market countries and, while valuations are still high, says they are not particularly so for India.

Secondly, the country’s GDP is strong, with the Indian economy growing by 7.3 per cent last year compared to 6.9 per cent in China and 3.1 per cent for the rest of the world. According to the country’s GDP data, this is expected to rise to 7.5 per cent in 2017. India’s current account deficit has fallen from 4.7 per cent of GDP in 2013 to 1 per cent expected this year, whilst overseas debt is now 23 per cent of GDP. As such the country is less sensitive to rising US interest rates or a strong dollar.
The third main driver for India is its favourable demographics, given that 55 per cent of the population are under 30 while 54 per cent are of working age, which he says will continue to rise given the skew to under 30s.

The implementation of a goods and services tax, the increase in the number of Indian citizens with access to a bank account and widespread foreign direct investment are all set to improve corporate governance and boost the economy’s growth. There is still a long way to go before Indian reforms are complete and there are risks when investing in any emerging market. However, the reforms being made today could unlock India’s potential. Much of the reform will help reduce corruption which has plagued the country and bring the informal economy into the mainstream. Modi is also making India a much easier place for companies to conduct business.

The growth potential of India and indeed the growth already coming through is not currently reflected in the market’s valuations which are trading close to their long-term averages and thus provides an interesting investment opportunity. As always seek advice where appropriate.

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